When you purchased your annuity years ago, you were attracted to the guaranteed stream of income and the relative safety of the product. But several years later, your life circumstances have changed and you would rather have some of your principal back.
If you’re in a situation where you need a lump sum of immediate income more than you need the regular annuity payments, you have the option of selling your remaining payments for cash.
There are several reasons why a person would consider selling their future income for a one-time payment. You may have an unexpected expense arise. Perhaps you want it for a downpayment on a home or to pay for a child’s or grandchild’s college tuition. Sometimes people get bored with retirement and decide to go back to work and therefore won’t need annuity payments down the road. Often, people who inherit the leftover balances on annuities would rather collect a lump sum than installments.
The secondary market for annuities
There are multiple companies that purchase future payments from annuitants in exchange for advancing cash. The buying of existing annuities is called the secondary market. The firms that handle these types of transactions work as middlemen between the annuity owners and the companies making the payments.
The price you will receive for your future payments will depend on a variety of factors, including:
• The total amount yet to be paid out
• The time over which that payout will be made
• Current demand for annuity payments
• Current interest rates
• The issuing insurance company’s financial strength
These factors are used to determine the buyer’s discount rate. If you add up all of the payments you are still due and subtract the buyer’s discount rate, the remaining sum will be what the annuity buyer pays you. For example, if you plan to sell $100,000 in payments and the buyer offers you a 10 discount rate, you will receive a cash payment of $90,000.
Selling your annuity can be a complicated process. That process will vary based on the type of contract you own.
If you’re selling a structured settlement annuity, when a person wins a court judgement and is paid through an annuity rather than in a lump sum, you will need to get a court’s approval to sell your payments. Part of the process will be convincing a judge why you need cash and that the transaction won’t put you in financial distress later.
If you’re selling an annuity that pays lifetime income, some secondary market firms will require you to obtain life insurance as part of the transaction. This is to protect the buyer of your annuity from losing a large sum of money if you pass away before it has received enough payments to cover the cash they provided you.
If you’re selling a variable annuity, especially if the annuity’s account value is less than your original investment, you may be able to sell it for its future death benefit. Some companies will buy annuity contracts in excess of their current account value for the death benefit. To qualify, the annuity must be non-qualified, meaning it cannot be part of a qualified retirement plan such as an IRA; the death benefit must be greater than the account value and the contract cannot be in the annuitization phase.
What to consider before you sell
Before you agree to sell your annuity:
Check with your insurance company or the agent who sold you the annuity to discuss other options beside selling the contract. For example, you may be able to withdraw a certain percentage of your account value without a surrender penalty. Even if you have to pay a surrender charge, that fee may be less than what a firm on the secondary market will deduct from your annuity’s value before providing a cash payment.
Also, if a need arises because of an illness or confinement to a nursing home, your annuity may have a waiver that allows you access to funds without incurring a penalty.
Determine how much cash you need immediately. The firms on the secondary market offer the options of selling your entire annuity or just a portion of it. If you opt to sell just a portion, you will still receive regular income payments, just not as much as you would have before selling the contract. Plus, you will receive a cash infusion for your immediate needs.
Think about how you will replace your retirement income. You likely purchased your annuity based in part on how much income it would provide in retirement. Assuming you still need that amount to live on in retirement, where will it now come from? Do you have other assets you can sell? Is there a way to reduce the amount of retirement income expenses? Will you return to work to replace that income?
Talk to your accountant or tax professional. There will likely be tax implications to this transaction, which you should know before you sign the papers. You don’t want to get a surprise tax bill.
Shop around and get quotes. There are many companies in the secondary market, and many will offer free quotes before you sign a deal. Find the one with the most optimal terms, especially as it relates to how much they will pay for your future income.